The Greek Debt (and Euro) Crisis Will Drag On and On...

Have to have one. This crisis will either blow over in the next two months or so or run until the end of 2010 and threaten to take down Greek and German banks (German banks look like the biggest holders of Greek government and bank debt) and the euro. It all depends on how the chronology plays out.

Deadline #1. End of March. Standard & Poor's said three days ago (February 23) that it may lower the credit rating on Greece's sovereign debt again at the end of March if political opposition prevents the government from delivering on its plans to reduce a budget deficit now running at 12.7% of GDP (gross domestic product.). A downgrade would raise the interest rates that Greece has to pay on its debt and make it harder to sell new bonds to repay those that mature in May.

Deadline #2: May. Greece needs to refinance about $27 billion in debt that matures in May, according to calculations by Bloomberg. Already investors are demanding a 3.48 percentage point premium over the benchmark German bonds before they'll buy Greek 10-year debt. That premium is four times the average premium of the last five years.

Deadline #3: June-July. If the bond sales go badly and if the Greek government's plan for cutting the budget deficit looks dead in the water, Standard & Poor's could cut the country's credit rating again and Moody's, which has kept its rating on Greece the same since December, could join in. That could take the credit rating on Greek bonds below investment grade. A junk-bond-like rating for Greece would send Greek interest rates higher yet and usher in a new stage in the crisis.

Deadline #4: The end of 2010. The fourth quarter is crunch time. The European Central Bank has said it wants to remove the emergency measures that let banks use below investment grade debt as collateral for loans from the bank. If the bank, as it has indicated, removes that emergency measure at the same time as the credit ratings on Greek sovereign debt fall below investment grade, it will set off a crisis at Greek banks. Greek banks are big holders of Greek national debt, which they then use as collateral for loans at the European Central Bank. Those loans are essential to the ability of Greek banks to fund themselves. No loans and the Greek banks wind up sitting on a huge supply of Greek sovereign debt that they would have to sell into what would become a market rout in order to remain liquid.

If this crisis gets to Deadline #4 without a resolution, it reaches a new level of seriousness because the operation of the entire Greek banking system comes into question. And if liquidity in the Greek banking sector freezes up, then so does the Greek economy.

And that would set the dominoes falling as banks in other European countries, especially German banks with their relatively large holdings of Greek government and bank debt, would face rapidly declining prices for debt in their portfolios.

It's the vulnerability of German banks to a Greek crisis, oddly enough, that's the best guarantee that the German government, whatever its current rhetoric, will intervene to prevent a Greek collapse. The Merkel government in Berlin knows that at some point the consequences of not acting will be felt in Frankfurt as much as in Athens.

My calendar, unfortunately, isn't a crystal ball. It can't predict when "at some point" will be. Until then, expect the euro to continue its retreat. The euro was trading at a one-year low to the yen this morning and had fallen below $1.35.